Third Party Administrator 401K Pros and Cons
A third party administrator 401k is a plan that uses an independent third party to administer many aspects of the plan. This method has both pros and cons, and can be used for both large and small business 401k plans successfully. With some other plan types the administration of the plan may be done by the business owner, another company employee, or the company offering the plan. A third party administrator 401k uses an outside resource for this job instead, and some say this complicates matters but others believe it results in more benefits and fewer problems for a number of reasons. For some the choice in IRA vs 401k may rest on how the specific plans offered are administered.
Pros: Solo 401k plans may also include the use of a TPA in some cases, although the small number of enrollees may make this undesirable and the owner of the business may choose to take on this role instead of paying to outsource it. Most third party administrator 401k plans involve large companies with many employees. Some pros of using a TPA plan include more effective management, better communication, more information about any 401k contribution limits in many cases, better service, more experience, and often faster compliance with any legal changes.
Cons: A third party administrator 401k plan does have some drawbacks as well though. There may be an additional charge involved for the third party, and this is a cost that may cause a hardship for some very small businesses with a low profit margin. In many cases a retirement savings calculator does not include this expense, and the results you receive may not be completely accurate. These cons are few though, and for most owners and companies the benefits of a third party administrator 401k will normally be much bigger than the drawbacks involved. While this plan type may not be right for everyone, it can be a good fit for most.